Banks today are facing stiff competition from innovative fintechs focusing on niches in the retail banking value chain. The advent of Open Banking will also facilitate the creation of new products and services that were previously impossible to imagine.
This creation of new products and services is blurring the gaps between banks’ traditional lines of business, such as payments and credit. Fintechs and banks see the importance of linking credit and payments, self-evident for many years with credit cards, but which is an emerging theme in payments innovation currently.
The millennials of today are uneasy carrying credit card balances, particularly as an aftermath of the struggle with debt during the financial crisis. They lend with more certain repayment terms, which helps them fund their big-ticket as well as smaller purchases while also consolidating their debts. Point-of-sale lending has emerged as a new category of lending to help such consumers finance new spending and to help merchants reduce basket abandonment. By partnering with merchants and embracing digital technologies, some disruptive fintechs are competing directly with credit cards and store cards to provide customers with quick and easy short-term credit at checkout.
One such disruptive fintech in this space is Klarna, which provides a “buy now pay later” option at the checkout. When visiting a website powered by Klarna, shoppers need to simply input their email ID and shipping address, without the need to set up an account or type in credit card information. The maximum purchase limit is different on each account and is determined by a credit assessment by Klarna. For retailers, Klarna assumes all the financial risk of encouraging shoppers to close the deal without payment. When the online retailer ships the product, Klarna pays the merchant directly, then sends a message to the consumer allowing 14 or 30 days to pay or return the item. Shoppers can also choose to pay on monthly installments with an interest component added. Behind the scenes, Klarna does checks that quickly determine if a shopper is a legitimate person and has good credit based on his or her email and shipping address.
Other companies in this space, like PayPal credit (formerly known as Bill me Later), have been steadily growing since 2008; PayPal credit offers a digital reusable line of credit to shop anywhere PayPal is accepted. Customers get up to six months to pay on purchases of $99 or more. Another player in this space is Affirm, which is also partnering with merchants to offer payment options, including financing as an alternative to credit cards.
Payments systems, like those offered by these players, are growing, are profitable and are encroaching more and more on traditional banking systems. The primary benefit of such a service is that removal of the payment step greatly reduces friction and shopping cart abandonment in the checkout process. The model proves to be a win-win for the customer and the retailer alike. The granting of a banking license to Klarna has enabled the fintech to move into ‘big bank’ territory and start offering its customers a larger range of financial services.
Banks such as Wells Fargo and Citigroup have been big players in point-of-sale loans historically—but these types of loans are now becoming increasingly popular. This is due to the advent of technology that enables merchants to offer the option of a loan at the moment of purchase, where they may have previously only accepted cash or credit cards. Of late, consumer loan growth has become a top priority for banks to diversify their loan books, which historically have been over-burdened with commercial loan portfolios.
Some banks have taken the route of partnering with fintechs to have their share in the POS lending scene—e.g. banks like SunTrust, Regions Financial Corp, Fifth Third Bancorp, etc. have been offering their loans through GreenSky, a fintech which enables merchants selling furniture, home improvement and medical firms to provide POS credit to their customers. GreenSky provides loans—from $5,000 to $55,000—which are funded in minutes by any of the banks in their network.
POS lending provides the much-needed portfolio diversification which banks need in their books. Burgeoning fintechs in this space are claiming their share of these loans from customers—and banks need to ensure they have their own plans in place to either partner with them, or speed up their digital innovation processes to get their fair share of the POS lending market. With the advent of technology and regulations aimed at removing friction in the customer journey, the linkage between payments and credit are strengthening like never before, and banks need to have their strategies ready to retain their dominant foothold in this space.